An annuity is a close financial cousin to a life insurance contract and pays periodic income benefits for a specific period of time or over the course of a lifetime. Life insurance companies offer annuities. There are two basic types of annuities: deferred and immediate. Deferred annuities allow assets to grow over time before being converted to income payments. Immediate annuities begin payments immediately, or within a year of purchase.
An annuity may be fixed or variable. The U.S. Securities and Exchange Commission typically does not regulate fixed annuities, but it does regulate variable annuities. In a fixed annuity, all assets underlying the annuity are held in the insurer's general account, with the insurer bearing the investment risk. In a variable annuity, all assets underlying the annuity are held in a separate account and the annuity owner bears the investment risk, directly participating in the gains and losses of those assets, net of any fees. These separate account assets are composed of assets in specified investment subaccounts provided within the annuities. These investment subaccounts are not publicly traded.
Many deferred annuities allow annuity owners to deposit additional money, possibly restricted to periods of time or to maximums or minimums.
A guaranteed minimum accumulation benefit (GMAB) provides that at a predetermined point in time during the accumulation period, the accumulation value will be no less than a predetermined value. A GMAB might guarantee that after 10 years the accumulation value is no less than 100% of purchase payments. Thus, after 10 years, if cumulative investment performance has been negative, the accumulation value would automatically be increased such that the accumulation value is equal to 100% of purchase payments.